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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2009



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

Commission File No. 0-20948





AUTOIMMUNE INC.

(Exact Name of Registrant as Specified in its Charter)







|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 13-348-9062                         
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

1199 Madia Street, Pasadena, CA 91103

(Address of Principal Executive Offices)

(626) 792-1235

(Issuers Telephone No., including Area Code)





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ̈  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated
filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.:



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.):    Yes   ̈    No  x

Number of shares outstanding of the registrants Common Stock as of November 6, 2009:



|                             |  |                              
|---------------------------- |  | -----------------------------
|Common Stock, par value $.01 |  | 16,999,623 shares outstanding









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##### Table of Contents

AUTOIMMUNE INC.

QUARTER ENDED SEPTEMBER 30, 2009

TABLE OF CONTENTS



|                                                                                                                                                                                                      |  |           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                                                                                                      |  | PageNumber
|PART IFINANCIAL INFORMATION                                                                                                                                                                          |  |           
|                                                                                                                                                                                                      | 
|Item 1Financial Statements (Unaudited)                                                                                                                                                               |  |           
|                                                                                                                                                                                                      | 
|Consolidated Balance Sheet as of December 31, 2008 and September 30, 2009
(unaudited)                                                                                                                 |  | 3         
|                                                                                                                                                                                                      | 
|Consolidated Statement of Operations for the three and nine months ended September 
30, 2008 and 2009 and for the period from September 9, 1988 (date of inception) to September 30, 2009 (unaudited) |  | 4         
|                                                                                                                                                                                                      | 
|Consolidated Statement of Cash Flows for the three and months ended September 
30, 2008 and 2009 and for the period from September 9, 1988 (date of inception) to September 30, 2009 (unaudited)      |  | 5         
|                                                                                                                                                                                                      | 
|Notes to the Unaudited Consolidated Financial Statements                                                                                                                                              |  | 6         
|                                                                                                                                                                                                      | 
|Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                          |  | 13        
|                                                                                                                                                                                                      | 
|Item 3Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                     |  | 17        
|                                                                                                                                                                                                      | 
|Item 4Controls and Procedures                                                                                                                                                                        |  | 17        
|                                                                                                                                                                                                      | 
|PART IIOTHER INFORMATION                                                                                                                                                                             |  |           
|                                                                                                                                                                                                      | 
|Item 6Exhibits                                                                                                                                                                                       |  | 17        
|                                                                                                                                                                                                      | 
|Signatures                                                                                                                                                                                            |  | 18        



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

AUTOIMMUNE INC.

(A development stage company)

CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                  |  | December 31,2008 |              |   | September 30,2009 |  
|ASSETS                                                                                                                                            |  |                  |              |   |                   |   |              |  
|Current assets:                                                                                                                                   |  |                  |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                         |  | $                | 8,475,000    |   |                   | $ | 3,232,000    |  
|Short-term marketable securities                                                                                                                  |  |                  |             |   |                   |   | 3,611,000    |  
|Accounts receivable                                                                                                                               |  |                  | 37,000       |   |                   |   | 174,000      |  
|Prepaid expenses, inventories and other current assets                                                                                            |  |                  | 158,000      |   |                   |   | 168,000      |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|Total current assets                                                                                                                              |  |                  | 8,670,000    |   |                   |   | 7,185,000    |  
|Long-term marketable securities                                                                                                                   |  |                  |             |   |                   |   | 1,305,000    |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|Total assets                                                                                                                                      |  | $                | 8,670,000    |   |                   | $ | 8,490,000    |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|                                                                                                                                                  |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                              |  |                  |              |   |                   |   |              |  
|Current liabilities:                                                                                                                              |  |                  |              |   |                   |   |              |  
|Accounts payable                                                                                                                                  |  | $                | 18,000       |   |                   | $ | 22,000       |  
|Accrued professional fees                                                                                                                         |  |                  | 110,000      |   |                   |   | 98,000       |  
|Deferred revenue                                                                                                                                  |  |                  | 19,000       |   |                   |   | 24,000       |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|Total current liabilities                                                                                                                         |  |                  | 147,000      |   |                   |   | 144,000      |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|                                                                                                                                                  |  |                 
|Commitments and contingencies                                                                                                                     |  |                  |              |   |                   |   |              |  
|Stockholders equity:                                                                                                                             |  |                  |              |   |                   |   |              |  
|Preferred stock, $0.01 par value: 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2008 and
September 30, 2009       |  |                  |             |   |                   |   |             |  
|Common stock, $0.01 par value; 25,000,000 shares authorized; 16,999,623 shares issued and outstanding at December 31, 2008
and September 30, 2009 |  |                  | 170,000      |   |                   |   | 170,000      |  
|Additional paid-in capital                                                                                                                        |  |                  | 118,426,000  |   |                   |   | 118,491,000  |  
|Deficit accumulated during the development stage                                                                                                  |  |                  | (110,106,000 | ) |                   |   | (110,360,000 | )
|Accumulated other comprehensive income                                                                                                            |  |                  |             |   |                   |   | 7,000        |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|Total AutoImmune shareholders equity                                                                                                             |  |                  | 8,490,000    |   |                   |   | 8,308,000    |  
|Noncontrolling interest                                                                                                                           |  |                  | 33,000       |   |                   |   | 38,000       |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|Total equity                                                                                                                                      |  |                  | 8,523,000    |   |                   |   | 8,346,000    |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  
|Total liabilities and equity                                                                                                                      |  | $                | 8,670,000    |   |                   | $ | 8,490,000    |  
|                                                                                                                                                  |  |                  |              |   |                   |   |              |  

The accompanying notes are an integral part of these consolidated financial
statements.



3



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AUTOIMMUNE INC.

(A development stage company)

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|--------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -------------------------------------------------------------------- |  | - | ----------------- | - |  | - | ---------- | - |  | - | ------------ | -
|                                                                |  | Three months ended |            |   | Nine months ended |   |            | Period
fromSeptember 9, 1988(date of inception)to September 30, 2009 | 
|                                                                |  | September 30,2008  |            |   | September 30,2009 |   |            | September 30,2008                                                    |  |   | September 30,2009 |   | 
|Revenue:                                                        |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|License rights                                                  |  | $                  | 45,000     |   |                   | $ | 45,000     |                                                                      |  | $ | 135,000           |   |  | $ | 135,000    |   |  | $ | 7,838,000    |  
|Option fees                                                     |  |                    | 1,000      |   |                   |   |           |                                                                      |  |   | 3,000             |   |  |   |           |   |  |   | 2,214,000    |  
|Research and development revenue under collaborative agreements |  |                    |           |   |                   |   |           |                                                                      |  |   |                  |   |  |   |           |   |  |   | 955,000      |  
|Product revenue                                                 |  |                    | 11,000     |   |                   |   | 192,000    |                                                                      |  |   | 87,000            |   |  |   | 390,000    |   |  |   | 866,000      |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Total revenue                                                   |  |                    | 57,000     |   |                   |   | 237,000    |                                                                      |  |   | 225,000           |   |  |   | 525,000    |   |  |   | 11,873,000   |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Costs and expenses:                                             |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Cost of product revenue                                         |  |                    | 1,000      |   |                   |   | 74,000     |                                                                      |  |   | 29,000            |   |  |   | 144,000    |   |  |   | 260,000      |  
|Research and development:                                       |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Related party                                                   |  |                    | 3,000      |   |                   |   | 3,000      |                                                                      |  |   | 9,000             |   |  |   | 9,000      |   |  |   | 20,016,000   |  
|All other                                                       |  |                    |           |   |                   |   | (8,000     | )                                                                    |  |   | 84,000            |   |  |   | 87,000     |   |  |   | 93,038,000   |  
|Selling, general and administrative                             |  |                    | 125,000    |   |                   |   | 150,000    |                                                                      |  |   | 511,000           |   |  |   | 518,000    |   |  |   | 22,619,000   |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Total costs and expenses                                        |  |                    | 129,000    |   |                   |   | 219,000    |                                                                      |  |   | 633,000           |   |  |   | 758,000    |   |  |   | 135,933,000  |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Total operating income (loss)                                   |  |                    | (72,000    | ) |                   |   | 18,000     |                                                                      |  |   | (408,000          | ) |  |   | (233,000   | ) |  |   | (124,060,000 | )
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Interest income                                                 |  |                    | 51,000     |   |                   |   | 8,000      |                                                                      |  |   | 195,000           |   |  |   | 25,000     |   |  |   | 14,349,000   |  
|Interest expense                                                |  |                    |           |   |                   |   |           |                                                                      |  |   |                  |   |  |   |           |   |  |   | (303,000     | )
|Equity in net loss of unconsolidated affiliate                  |  |                    |           |   |                   |   |           |                                                                      |  |   |                  |   |  |   |           |   |  |   | (250,000     | )
|Other expense                                                   |  |                    |           |   |                   |   |           |                                                                      |  |   |                  |   |  |   |           |   |  |   | (50,000      | )
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Net income (loss)                                               |  | $                  | (21,000    | ) |                   | $ | 26,000     |                                                                      |  | $ | (213,000          | ) |  | $ | (208,000   | ) |  | $ | (110,314,000 | )
|Less: Net income attributable to noncontrolling interest        |  |                    | 2,000      |   |                   |   | 24,000     |                                                                      |  |   | 3,000             |   |  |   | 46,000     |   |  |   | 42,000       |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Net income (loss) attributable to AutoImmune, Inc.              |  | $                  | (23,000    | ) |                   | $ | 2,000      |                                                                      |  | $ | (216,000          | ) |  | $ | (254,000   | ) |  | $ | (110,356,000 | )
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Net income (loss) per share-basic                               |  | $                  | (0.00      | ) |                   | $ | 0.00       |                                                                      |  | $ | (0.01             | ) |  | $ | (0.01      | ) |  |   |              |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Net income (loss) per share-diluted                             |  | $                  | (0.00      | ) |                   | $ | 0.00       |                                                                      |  | $ | (0.01             | ) |  | $ | (0.01      | ) |  |   |              |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Weighted average common shares outstanding-basic                |  |                    | 16,999,623 |   |                   |   | 16,999,623 |                                                                      |  |   | 16,998,820        |   |  |   | 16,999,623 |   |  |   |              |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  
|Weighted average common shares outstanding-diluted              |  |                    | 16,999,623 |   |                   |   | 17,159,754 |                                                                      |  |   | 16,998,820        |   |  |   | 16,999,623 |   |  |   |              |  
|                                                                |  |                    |            |   |                   |   |            |                                                                      |  |   |                   |   |  |   |            |   |  |   |              |  

The accompanying notes are an integral part of these consolidated financial
statements.



4



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AUTOIMMUNE INC.

(A development stage company)

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | -------------------------------------------------------------------- | - | ---------- | - |  | - | ------------ | -
|                                                                                                                    |  | Nine months ended |           |   | Period fromSeptember 9, 1988(date of inception)to September 30, 2009 |  
|                                                                                                                    |  | September 30,2008 |           |   | September 30,2009                                                    |   |           
|Cash flows from operating activities:                                                                               |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Net loss                                                                                                            |  | $                 | (213,000  | ) |                                                                      | $ | (208,000   | ) |  | $ | (110,314,000 | )
|Adjustment to reconcile net loss to net cash used by operating activities:                                          |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Interest expense related to demand notes converted into Series A mandatorily redeemable convertible preferred
stock |  |                   |          |   |                                                                      |   |           |   |  |   | 48,000       |  
|Patent costs paid with junior convertible preferred and common stock                                                |  |                   |          |   |                                                                      |   |           |   |  |   | 3,000        |  
|Valuation of warrants issued in conjunction with license revenue                                                    |  |                   |          |   |                                                                      |   |           |   |  |   | 347,000      |  
|Noncash stock compensation                                                                                          |  |                   | 94,000    |   |                                                                      |   | 65,000     |   |  |   | 317,000      |  
|Noncash contributions to joint venture from noncontrolling interest                                                 |  |                   | 10,000    |   |                                                                      |   | 9,000      |   |  |   | 46,000       |  
|Depreciation and amortization                                                                                       |  |                   |          |   |                                                                      |   |           |   |  |   | 4,464,000    |  
|Loss on sale/disposal of fixed assets                                                                               |  |                   |          |   |                                                                      |   |           |   |  |   | 642,000      |  
|Noncash interest income                                                                                             |  |                   |          |   |                                                                      |   |           |   |  |   | (3,000       | )
|Decrease in patent costs                                                                                            |  |                   |          |   |                                                                      |   |           |   |  |   | 563,000      |  
|Impairment of investment in OraGen                                                                                  |  |                   |          |   |                                                                      |   |           |   |  |   | 100,000      |  
|Equity in net loss of unconsolidated affiliate                                                                      |  |                   |          |   |                                                                      |   |           |   |  |   | 250,000      |  
|(Increase) decrease in accounts receivable                                                                          |  |                   | 7,000     |   |                                                                      |   | (137,000   | ) |  |   | (174,000     | )
|(Increase) decrease in prepaid expenses and other current assets                                                    |  |                   | 6,000     |   |                                                                      |   | (10,000    | ) |  |   | (168,000     | )
|Increase (decrease) in accounts payable                                                                             |  |                   | (8,000    | ) |                                                                      |   | 4,000      |   |  |   | 22,000       |  
|Increase (decrease) in accrued expenses                                                                             |  |                   | 11,000    |   |                                                                      |   | (12,000    | ) |  |   | 78,000       |  
|Increase (decrease) in deferred revenue                                                                             |  |                   | (2,000    | ) |                                                                      |   | 5,000      |   |  |   | 24,000       |  
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Net cash used by operating activities                                                                               |  |                   | (95,000   | ) |                                                                      |   | (284,000   | ) |  |   | (103,755,000 | )
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|                                                                                                                    |  |                   |          
|Cash flows from investing activities:                                                                               |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Purchase of available-for-sale marketable securities                                                                |  |                   |          |   |                                                                      |   | (4,909,000 | ) |  |   | (327,224,000 | )
|Proceeds from sale/maturity of available-for-sale marketable securities                                             |  |                   | 807,000   |   |                                                                      |   |           |   |  |   | 311,307,000  |  
|Proceeds from maturity of held-to-maturity marketable securities                                                    |  |                   |          |   |                                                                      |   |           |   |  |   | 11,011,000   |  
|Proceeds from sale of equipment                                                                                     |  |                   |          |   |                                                                      |   |           |   |  |   | 306,000      |  
|Purchase of fixed assets                                                                                            |  |                   |          |   |                                                                      |   |           |   |  |   | (5,288,000   | )
|Investment in OraGen                                                                                                |  |                   |          |   |                                                                      |   |           |   |  |   | (100,000     | )
|Investment in Colloral LLC                                                                                          |  |                   |          |   |                                                                      |   |           |   |  |   | (230,000     | )
|Distribution from Colloral LLC to joint venture partner                                                             |  |                   |          |   |                                                                      |   | (50,000    | ) |  |   | (50,000      | )
|Increase in patent costs                                                                                            |  |                   |          |   |                                                                      |   |           |   |  |   | (563,000     | )
|Increase in other assets                                                                                            |  |                   |          |   |                                                                      |   |           |   |  |   | (125,000     | )
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Net cash used by investing activities                                                                               |  |                   | 807,000   |   |                                                                      |   | (4,959,000 | ) |  |   | (10,956,000  | )
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|                                                                                                                    |  |                   |          
|Cash flows from financing activities:                                                                               |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Proceeds from sale-leaseback of fixed assets                                                                        |  |                   |          |   |                                                                      |   |           |   |  |   | 2,872,000    |  
|Payments on obligations under capital leases                                                                        |  |                   |          |   |                                                                      |   |           |   |  |   | (2,872,000   | )
|Net proceeds from issuance of mandatorily redeemable convertible preferred stock                                    |  |                   |          |   |                                                                      |   |           |   |  |   | 10,011,000   |  
|Proceeds from bridge notes                                                                                          |  |                   |          |   |                                                                      |   |           |   |  |   | 300,000      |  
|Proceeds from issuance of common stock                                                                              |  |                   | 10,000    |   |                                                                      |   |           |   |  |   | 105,557,000  |  
|Proceeds from issuance of convertible notes payable                                                                 |  |                   |          |   |                                                                      |   |           |   |  |   | 2,200,000    |  
|Payments for repurchase of outstanding warrants                                                                     |  |                   | (125,000  | ) |                                                                      |   |           |   |  |   | (125,000     | )
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Net cash provided by financing activities                                                                           |  |                   | (115,000  | ) |                                                                      |   |           |   |  |   | 117,943,000  |  
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Net increase (decrease) in cash and cash equivalents                                                                |  |                   | 597,000   |   |                                                                      |   | (5,243,000 | ) |  |   | 3,232,000    |  
|Cash and cash equivalents, beginning of period                                                                      |  |                   | 7,994,000 |   |                                                                      |   | 8,475,000  |   |  |   |             |  
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  
|Cash and cash equivalents, end of period                                                                            |  | $                 | 8,591,000 |   |                                                                      | $ | 3,232,000  |   |  | $ | 3,232,000    |  
|                                                                                                                    |  |                   |           |   |                                                                      |   |            |   |  |   |              |  

The accompanying notes are an integral part of these consolidated financial
statements.



5



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##### Table of Contents

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The interim financial data as of September 30, 2009, for the three and nine months ended September 30, 2008 and 2009 and for the
period from inception (September 9, 1988) through September 30, 2009 are unaudited; however, in our opinion the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the
results for these interim periods. The consolidated balance sheet presented as of December 31, 2008 has been derived from our audited consolidated financial statements as of that date. These financial statements should be read in conjunction
with the financial statements and the notes thereto for the year ended December 31, 2008 included in our Form 10-K. Results for interim periods are not necessarily indicative of results for the entire year. Certain amounts have been
reclassified to conform to the current presentations. Our consolidated financial statements include the accounts of AutoImmune Inc. and our joint venture with Deseret Laboratories, Inc. (Deseret), Colloral LLC. We began to consolidate
Colloral LLC in the third quarter of 2005 when it qualified as a variable interest entity of which we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 6 for
additional information related to our interest in Colloral LLC.

In June 2009, the Financial Accounting Standards Board, or FASB, issued the
FASB Accounting Standards Codification, or Codification. Effective this quarter, the Codification became the single source for all authoritative generally accepted accounting principles, or GAAP, recognized by the FASB and is required to be applied
to financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and did not impact our financial position or results of operations.

2. Stock Compensation

We have several
stock-based employee compensation plans. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Stock-based employee compensation expense was
$27,000 and $22,000 for the three months ended September 30, 2008 and 2009, respectively, and $94,000 and $65,000 for the nine months ended September 30, 2008 and 2009, respectively, and is recorded as selling, general and administrative
expense in the accompanying consolidated statement of operations.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average assumptions used for grants in nine months ended September 30, 2008 and 2009:



|                                |  |                                |  |               
|------------------------------- |  | ------------------------------ |  | --------------
|                                |  | Nine months endedSeptember 30,
|                                |  | 2008                           |  | 2009          
|Risk free interest rate range   |  | 2.7% to 3.25%                  |  | 1.11% to 2.60%
|Expected range of life in years |  | 3 to 6 years                   |  | 3 to 6 years  
|Expected volatility             |  | 55% to 72%                     |  | 52% to 68%    
|Expected dividends              |  |                               |  |              

There were no grants during the three months ended September 30, 2008 and 2009. Estimates of
fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

3. Net
Income (Loss) Per Share  Basic and Diluted

Basic net income (loss) per share is calculated based on the weighted average number of
common shares outstanding during the period. Diluted net income per share is calculated based on the weighted average number of common shares and dilutive common stock equivalent shares assumed outstanding during the period. For the three and nine
month periods ended September 30, 2008, shares used to compute diluted net income per share excluded 1,211,500 stock options as their inclusion would have been anti-dilutive due to net losses incurred in these periods. For the nine month period
ended September 30, 2009, shares used to compute diluted net income per share excluded 1,227,000 stock options as their inclusion would have been anti-dilutive due to net losses incurred in this period. For the three month period ended
September 30, 2009 the difference between weighted average shares outstanding basic and diluted is due to the effect of stock options with exercise prices less than the average market value of the common stock. For the three month period ended
September 30, 2009, stock options to purchase 727,000 weighted shares of common stock with exercise prices greater than the average market value of the common stock were outstanding and accordingly, were excluded from the calculation of diluted
net income per share.



6



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##### Table of Contents

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4. Fair Value Measurements

Effective this fiscal year, we implemented a newly issued accounting standard for fair value measurements of our non-financial assets and liabilities that are remeasured at fair value on a non-recurring
basis. The adoption of the accounting standard for our non-financial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact our financial position or results of operations; however, it could have an impact
in future periods. In addition, we may have additional disclosure requirements in the event we complete an acquisition or incur impairment of our assets in future periods.

During the quarter ended June 30, 2009, we implemented newly issue accounting standards which provide additional guidelines for determining fair value when the volume and level of activity for the
asset or liability have significantly decreased and identifying circumstances that indicate that a transaction is not orderly. Specifically, the new standards provide additional guidelines for making fair value measurements more consistent with
principles presented and provide authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed. This guidance is applicable to all assets and liabilities (i.e. financial and nonfinancial) and
requires enhanced disclosures, including interim and annual disclosure of the input and valuation techniques (or changes in techniques) used to measure fair value and the defining of the major security types comprising debt and equity securities
held based upon the nature and risk of the security. The adoption of the new standards did not impact our financial position or results of operations.

During the quarter ended June 30, 2009, we also implemented a newly issued accounting standard requiring disclosure about the fair value of financial instruments in interim as well as in annual financial statements. Since this standard
addresses disclosure requirements and the carrying amounts of our instruments approximate their fair values, the adoption of this standard did not impact our financial position or results of operations.

The following table presents information about our assets that are measured at fair value on a recurring basis as of September 30, 2009 and
December 31, 2008, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or
liability, and include situations where there is little, if any, market activity for the asset:



|                                      |  |                   |           |                                        |   |                                           |  |                                        |           |  |   |  
|------------------------------------- |  | ----------------- | --------- | -------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | --------- |  | - | -
|                                      |  | September 30,2009 |           | Quoted Pricesin ActiveMarkets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Cash equivalents (money-market funds) |  | $                 | 2,984,000 |                                        | $ | 2,984,000                                 |  | $                                      |          |  | $ | 
|Short-term marketable securities:     |  |                   |           |                                        |   |                                           |  |                                        |           |  |   |  
|U.S. Treasury bills                   |  |                   | 2,598,000 |                                        |   | 2,598,000                                 |  |                                        |          |  |   | 
|U.S. Government Agency notes          |  |                   | 1,013,000 |                                        |   |                                          |  |                                        | 1,013,000 |  |   | 
|                                      |  |                   |           |                                        |   |                                           |  |                                        |           |  |   |  
|                                      |  |                   |           |                                       
|Total                                 |  | $                 | 6,595,000 |                                        | $ | 5,582,000                                 |  | $                                      | 1,013,000 |  | $ | 
|                                      |  |                   |           |                                        |   |                                           |  |                                        |           |  |   |  
|                                      |  |                   |           |                                       
|Long-term U.S. Treasury notes         |  |                   | 1,305,000 |                                        |   | 1,305,000                                 |  |                                        |          |  |   | 
|                                      |  |                   |           |                                        |   |                                           |  |                                        |           |  |   |  
|                                      |  |                   |           |                                       
|Total                                 |  | $                 | 7,900,000 |                                        | $ | 6,887,000                                 |  | $                                      | 1,013,000 |  | $ | 
|                                      |  |                   |           |                                        |   |                                           |  |                                        |           |  |   |  



|                                      |  |                  |           |                                        |   |                                           |  |                                        |   |  |   |  
|------------------------------------- |  | ---------------- | --------- | -------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | -
|                                      |  | December 31,2008 |           | Quoted Pricesin ActiveMarkets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Assets:                               |  |                  |           |                                        |   |                                           |  |                                        |   |  |   |  
|Cash equivalents (money-market funds) |  | $                | 8,206,000 |                                        | $ | 8,206,000                                 |  | $                                      |  |  | $ | 
|                                      |  |                  |           |                                        |   |                                           |  |                                        |   |  |   |  
|Total                                 |  | $                | 8,206,000 |                                        | $ | 8,206,000                                 |  | $                                      |  |  | $ | 
|                                      |  |                  |           |                                        |   |                                           |  |                                        |   |  |   |  

The fair values of cash equivalents and marketable securities are determined through market,
observable and corroborated sources.



7



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##### Table of Contents

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The carrying amounts reflected in the consolidated balance sheets for cash, accounts receivable, other
current assets, accounts payable and accrued expenses and other approximate fair value due to their short-term maturities.

5. Cash
Equivalents and Marketable Securities

Cash equivalents are carried at cost which approximated fair value at December 31, 2008 and
September 30, 2009, and were primarily invested in money market accounts. Marketable securities are carried at amortized cost which approximated fair value at September 30, 2009 and were primarily invested in U.S. Government Agency debt
securities. We did not hold any marketable securities at December 31, 2008.

The following is a summary of available-for-sale marketable
securities held by us at September 30, 2009 which are carried at fair market value:



|                                                               |  |               |  |            |           |                 |   |                  |  |               |   |  |   |          
|-------------------------------------------------------------- |  | ------------- |  | ---------- | --------- | --------------- | - | ---------------- |  | ------------- | - |  | - | ---------
|                                                               |  | Maturity term |  | Fair Value |           | Unrealizedgains |   | Unrealizedlosses |  | Amortizedcost
|September 30, 2009:                                            |  |               |  |            |           |                 |   |                  |  |               |   |  |   |          
|U.S. Government Agency debt securities and U.S. Treasury bills |  | Within 1 year |  | $          | 3,611,000 |                 | $ | 2,000            |  | $             |  |  | $ | 3,609,000
|U.S. Treasury notes                                            |  | Beyond 1 year |  | $          | 1,305,000 |                 | $ | 5,000            |  | $             |  |  | $ | 1,300,000
|                                                               |  |               |  |            |           |                 |   |                  |  |               |   |  |   |          
|                                                               |  |               |  | $          | 4,916,000 |                 | $ | 7,000            |  | $             |  |  | $ | 4,909,000
|                                                               |  |               |  |            |           |                 |   |                  |  |               |   |  |   |          

Our marketable securities that were classified as current at September 30, 2009 mature within
one year and are available to meet working capital needs and to fund current operations. There were no gross realized gains and losses on sales of marketable securities for the nine months ended September 30, 2009.

Marketable securities that were purchased and sold in periods prior to January 1, 1994, other than held-to-maturity marketable securities, are included
in the category available-for-sale marketable securities in the period from inception column of the statement of cash flows.

6. Joint Venture

The accounting standards address consolidation by business enterprises of variable interest entities that
possess certain characteristics. A variable interest entity is an entity that does not have sufficient equity investment to permit it to finance its activities without additional financial support from a third party, or whose equity investors lack
the characteristics of a controlling financial interest. The authoritative guidance establishes standards for determining under what circumstances variable interest entities should be consolidated with their primary beneficiary. We evaluate all
transactions and relationships with potential variable interest entities (VIEs) in accordance with the standards.

Our overall methodology for
evaluating transactions and relationships includes the following:



| |  |  | determining whether the entity is a VIE, and, if so,
| | - |  | ----------------------------------------------------



| |  |  | determining whether we are the primary beneficiary of the VIE.
| | - |  | --------------------------------------------------------------

In performing the first step, the significant factors and judgments that we consider include:



| |  |  | the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the
entity was designed to create and distribute to its interest holders,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the nature of our involvement with the entity,
| | - |  | ----------------------------------------------



| |  |  | whether control of the entity results through arrangements that do not involve voting equity,
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | whether there is sufficient equity investment at risk to finance the activities of the entity, and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive expected residual returns.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

For each VIE identified, we evaluate whether we are the primary beneficiary of the VIE by considering:



| |  |  | whether our variable interest absorbs the majority of the VIEs expected losses,
| | - |  | --------------------------------------------------------------------------------



| |  |  | whether our variable interest receives the majority of the VIEs expected residual returns, and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | whether we have the ability to make decisions that significantly affect the VIEs results and activities.
| | - |  | ---------------------------------------------------------------------------------------------------------

Based on our evaluation of the above factors and judgments, as of September 30, 2009, we consolidate one VIE, Colloral LLC, of which we are the primary
beneficiary.



8



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##### Table of Contents

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In August 2002, we entered into our joint venture with Deseret by forming Colloral
LLC to manufacture, market and sell Colloral® as a dietary supplement. Our economic interest in Colloral LLC is
greater than 50% and we actively participate in its management, but we do not have voting control of Colloral LLC. Therefore, the investment had historically been accounted for using the equity method. Upon adoption of the VIE standards in 2003, our
interest in Colloral LLC did not qualify as a variable interest entity, and, therefore, we continued to account for our investment in Colloral LLC under the equity method of accounting until August 2005. In August 2005, we amended the Colloral LLC
operating agreement to increase our share of distributions and allocations of profits and losses in return for our commitment to fund 100% of the costs associated with the implementation of a marketing program for The Collagen Solution. As a result
of the amendments to the operating agreement, Colloral LLC is considered a variable interest entity, of which we are the primary beneficiary. We are required to consolidate Colloral LLC for financial reporting purposes, effective in the third
quarter of 2005. We re-evaluate the provisions of the VIE standards when triggering events arise and, to date, no events have transpired which would require deconsolidation. Certain events may arise in the future, including additional modifications
to the operating agreements, which may require us to re-evaluate the joint venture. Such re-evaluation may result in a conclusion that the joint venture is no longer a variable interest entity requiring consolidation.

In accordance with the amendment to the Colloral LLC operating agreement, we made additional capital contributions of $1,032,000 to Colloral LLC from 2003
through 2007. We satisfied our funding commitment in 2006 and made no capital contributions during the year ended December 31, 2008 or the nine months ended September 30, 2009. We may make additional contributions to Colloral LLC in the
future. There can be no assurance that the sales and marketing initiatives that have been or, in the future, may be funded by our capital contributions will be successful. Accordingly, in the future we may again incur substantial losses.

At December 31, 2008 and September 30, 2009, the excess of Deserets capital contributions over their portion of the accumulated losses is
recorded as a noncontrolling interest in our consolidated balance sheet.

The following table contains selected financial data for Colloral
LLC. Shipping and handling costs have been classified as selling expenses. The balance sheet amounts as of December 31, 2008 and September 30, 2009 and Colloral LLCs operating results for the three and nine months ended
September 30, 2008 and 2009 have been consolidated into our financial statements:



|                                            |  |                                 |        |                                |   |         |  |      |        |  |   |        
|------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------- |  | ---- | ------ |  | - | -------
|                                            |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                                            |  | 2008                            |        | 2009                           |   | 2008    |  | 2009
|Statement of Operations Data:               |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Revenue                                     |  | $                               | 12,000 |                                | $ | 192,000 |  | $    | 90,000 |  | $ | 390,000
|Cost of goods sold                          |  |                                 | 1,000  |                                |   | 74,000  |  |      | 29,000 |  |   | 144,000
|Selling, general and administrative expense |  |                                 | 9,000  |                                |   | 21,000  |  |      | 47,000 |  |   | 61,000 
|Net income                                  |  | $                               | 2,000  |                                | $ | 97,000  |  | $    | 14,000 |  | $ | 185,000



|                      |  |                  |         |                   |   |        
|--------------------- |  | ---------------- | ------- | ----------------- | - | -------
|                      |  | December 31,2008 |         | September 30,2009
|Balance Sheet Data:   |  |                  |         |                   |   |        
|Current assets        |  | $                | 219,000 |                   | $ | 390,000
|Long term assets      |  |                  |        |                   |   |       
|Current liabilities   |  |                  | 6,000   |                   |   | 33,000 
|Long term liabilities |  |                  |        |                   |   |       

As of December 31, 2008 and September 30, 2009, current liabilities included $0 and
$22,000, respectively, payable to Deseret, a related party. In July 2009, Colloral LLC made a distribution in the amount of $50,000 to Deseret which was recorded as a return of capital.

In 2000, we completed a market analysis of Colloral as a dietary supplement and subsequently filed a Notice of New Dietary Ingredient with the FDA that was accepted without comment. On
February 18, 2005, we received a letter from the FDA stating that the FDA reconsidered the information contained in our Notice of New Dietary Ingredient and concluded that Colloral is not a dietary supplement but appears to be a drug under the
Federal Food, Drug, and Cosmetic Act, and thus subject to the regulatory requirements for drugs. On April 15, 2005, we submitted a response to the FDAs letter and hope to have demonstrated that the product meets the statutory definition
of a dietary supplement. We cannot predict what the effect of the FDAs letter will be. It is possible that Colloral LLC and its licensed distributors will be unable to market the product as a dietary supplement and that the products will be
subject to the regulatory requirements for drugs. If the FDA makes a final determination that requires us to comply with the regulatory requirements for drugs, Colloral, The Collagen Solution and Vital 3 will be withdrawn from the market, which
would eliminate the possibility of future distributions to us from Colloral LLC.



9



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##### Table of Contents

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Effective January 1, 2009, we adopted a newly issued accounting standard for noncontrolling
interests. In accordance with the accounting standard, we changed the accounting for minority interests, which will be reclassified as noncontrolling interests and classified as a component of equity. The adoption of the new standard has resulted in
the reclassification of amounts previously attributable to minority interest (now referred to as noncontrolling interest) to a separate component of Shareholders Equity on the accompanying consolidated balance sheet. Additionally, net income
attributable to noncontrolling interests is shown separately from net income in the consolidated statements of income. Finally, the net loss reflected on the statement of cash flows is the consolidated net loss. This reclassification had no effect
on our previously reported financial position or results of operations.

Prior year amounts related to noncontrolling interest (previously
referred to as minority interest) have been reclassified to conform to the current year presentation.

The following table presents a
reconciliation of the changes in equity during the three and nine months ended September 30, 2008 and 2009:



|                                           |  |                                  |           |   |                        |   |        |  |   |                      |   |  |                        |           |   |       |   |         |   |  |   |           |  
|------------------------------------------ |  | -------------------------------- | --------- | - | ---------------------- | - | ------ |  | - | -------------------- | - |  | ---------------------- | --------- | - | ----- | - | ------- | - |  | - | --------- | -
|                                           |  | Three months ended September 30, |          
|                                           |  | 2008                             |           |   | 2009                   |  
|                                           |  | AutoImmunesInterest             |           |   | NoncontrollingInterest |   | Total  |  |   | AutoImmunesInterest |   |  | NoncontrollingInterest |           |   | Total |  
|Balance at the beginning of the period     |  | $                                | 8,589,000 |   |                        | $ | 19,000 |  | $ | 8,608,000            |   |  | $                      | 8,279,000 |   |       | $ | 60,000  |   |  | $ | 8,339,000 |  
|Net income (loss)                          |  |                                  | (23,000   | ) |                        |   | 2,000  |  |   | (21,000              | ) |  |                        | 2,000     |   |       |   | 24,000  |   |  |   | 26,000    |  
|Stock-based employee compensation          |  |                                  | 27,000    |   |                        |   |       |  |   | 27,000               |   |  |                        | 22,000    |   |       |   |        |   |  |   | 22,000    |  
|Contributions from noncontrolling interest |  |                                  |          |   |                        |   | 3,000  |  |   | 3,000                |   |  |                        |          |   |       |   | 4,000   |   |  |   | 4,000     |  
|Distributions to noncontrolling interest   |  |                                  |          |   |                        |   |       |  |   |                     |   |  |                        |          |   |       |   | (50,000 | ) |  |   | (50,000   | )
|Other comprehensive income (loss)          |  |                                  | (1,000    | ) |                        |   |       |  |   | (1,000               | ) |  |                        | 5,000     |   |       |   |        |   |  |   | 5,000     |  
|                                           |  |                                  |           |   |                        |   |        |  |   |                      |   |  |                        |           |   |       |   |         |   |  |   |           |  
|Balance at the end of the period           |  | $                                | 8,592,000 |   |                        | $ | 24,000 |  | $ | 8,616,000            |   |  | $                      | 8,308,000 |   |       | $ | 38,000  |   |  | $ | 8,346,000 |  
|                                           |  |                                  |           |   |                        |   |        |  |   |                      |   |  |                        |           |   |       |   |         |   |  |   |           |  
|                                           | 
|                                           |  | Nine months ended September 30,  |          
|                                           |  | 2008                             |           |   | 2009                   |  
|                                           |  | AutoImmunesInterest             |           |   | NoncontrollingInterest |   | Total  |  |   | AutoImmunesInterest |   |  | NoncontrollingInterest |           |   | Total |  
|Balance at the beginning of the period     |  | $                                | 8,832,000 |   |                        | $ | 11,000 |  | $ | 8,843,000            |   |  | $                      | 8,490,000 |   |       | $ | 33,000  |   |  | $ | 8,523,000 |  
|Net income (loss)                          |  |                                  | (216,000  | ) |                        |   | 3,000  |  |   | (213,000             | ) |  |                        | (254,000  | ) |       |   | 46,000  |   |  |   | (208,000  | )
|Stock-based employee compensation          |  |                                  | 94,000    |   |                        |   |       |  |   | 94,000               |   |  |                        | 65,000    |   |       |   |        |   |  |   | 65,000    |  
|Issuance of common shares                  |  |                                  | 10,000    |   |                        |   |       |  |   | 10,000               |   |  |                        |          |   |       |   |        |   |  |   |          |  
|Repurchase of outstanding warrants         |  |                                  | (125,000  | ) |                        |   |       |  |   | (125,000             | ) |  |                        |          |   |       |   |        |   |  |   |          |  
|Contributions from noncontrolling interest |  |                                  |          |   |                        |   | 10,000 |  |   | 10,000               |   |  |                        |          |   |       |   | 9,000   |   |  |   | 9,000     |  
|Distributions to noncontrolling interest   |  |                                  |          |   |                        |   |       |  |   |                     |   |  |                        |          |   |       |   | (50,000 | ) |  |   | (50,000   | )
|Other comprehensive income (loss)          |  |                                  | (3,000    | ) |                        |   |       |  |   | (3,000               | ) |  |                        | 7,000     |   |       |   |        |   |  |   | 7,000     |  
|                                           |  |                                  |           |   |                        |   |        |  |   |                      |   |  |                        |           |   |       |   |         |   |  |   |           |  
|Balance at the end of the period           |  | $                                | 8,592,000 |   |                        | $ | 24,000 |  | $ | 8,616,000            |   |  | $                      | 8,308,000 |   |       | $ | 38,000  |   |  | $ | 8,346,000 |  
|                                           |  |                                  |           |   |                        |   |        |  |   |                      |   |  |                        |           |   |       |   |         |   |  |   |           |  



10



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##### Table of Contents

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7. Accumulated Other Comprehensive Loss

The components of comprehensive loss, none of which is attributable to the noncontrolling interest, consisted of the following:



|                                                  |  |                                         |         |                                        |      |   |       |  |   |          |   |  |   |          |  
|------------------------------------------------- |  | --------------------------------------- | ------- | -------------------------------------- | ---- | - | ----- |  | - | -------- | - |  | - | -------- | -
|                                                  |  | For the three months endedSeptember 30, |         | For the nine months endedSeptember 30, |     
|                                                  |  | 2008                                    |         |                                        | 2009 |   | 2008  |  |   | 2009     |  
|Net income (loss) attributable to AutoImmune Inc. |  | $                                       | (23,000 | )                                      |      | $ | 2,000 |  | $ | (216,000 | ) |  | $ | (254,000 | )
|Change in unrealized gain (loss) on investments   |  |                                         | (1,000  | )                                      |      |   | 5,000 |  |   | (3,000   | ) |  |   | 7,000    |  
|                                                  |  |                                         |         |                                        |      |   |       |  |   |          |   |  |   |          |  
|                                                  |  |                                         |         |                                       
|Comprehensive loss                                |  | $                                       | (24,000 | )                                      |      | $ | 7,000 |  | $ | (219,000 | ) |  | $ | (247,000 | )
|                                                  |  |                                         |         |                                        |      |   |       |  |   |          |   |  |   |          |  

8. Warrant redemption

In March 2000, we entered an agreement under which a subsidiary of Elan Plc purchased all of our rights to certain patent applications involving the treatment of Alzheimers Disease. In connection
with the agreement, Elan Plc received a warrant to purchase 375,000 shares of our common stock at $3.13 per share in September 2001 and a warrant to purchase 375,000 shares of our common stock at $0.7275 per share in March 2003. The warrant to
purchase 375,000 shares of our common stock at $3.13 per share expired effective September 16, 2006. On February 27, 2008, we entered into a securities redemption agreement to repurchase the warrant to purchase 375,000 shares of our common
stock at $0.7275 from Elan Plc for $125,000, which was recorded as a reduction of additional paid in capital.

9. Indemnification

We enter into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, we indemnify, hold
harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners, in connection with any U.S. patent, copyright or other intellectual property infringement claim by any
third party with respect to our products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments that could be required under these indemnification agreements is unlimited. We have never
incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal.

10. Subsequent Events

We evaluated all events or transactions that occurred after
September 30, 2009 up through November 13, 2009, the date we issued these financial statements. During this period we did not have any material recognizable subsequent events. However, we did have a nonrecognizable subsequent event.

On October 21, 2009, our Board of Directors authorized the retention of Junewicz & Co., Inc. to lead the exploration of a full
range of strategic alternatives in order to enhance shareholder value. Those strategic options include, but are not limited to, the sale or merger of the company.

11. New Accounting Pronouncements

From time to time, new accounting pronouncements are
issued by the FASB or other standard setting bodies that are adopted as of the specified effective date. Unless otherwise discussed, the Companys management believes that the impact of recently issued standards that are not yet effective will
not have a material impact on its consolidated financial position or results of operations upon adoption.

Recently
Adopted Accounting Standards

Effective January 1, 2009, we adopted a newly issued accounting standard for business combinations.
This standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets
acquired and liabilities assumed, and requires the acquirer to disclose certain information to enable users to understand the nature and financial effect of the business combination. The statement requires that cash outflows such as transaction
costs and post-acquisition restructuring be charged to expense instead of capitalized as a cost of the acquisition. Contingent purchase price will be recorded at its initial fair value and then re-measured as time passes through adjustments to net
income. Due to the fact that the standard is applicable to future acquisitions completed after January 1, 2009 and we did not have any business combinations in the first nine months of 2009, the adoption did not have an impact on our
consolidated financial statements.



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AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Effective January 1, 2009, we implemented newly issued accounting standards for collaborative
arrangements. The standard established the definition of a collaborative arrangement and determined that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the
criteria in the accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and the arrangements terms, the nature of the entitys business, and whether those payments are within the scope
of other accounting literature would be presented. Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification and amounts of significant financial- statement
amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure applies to the entire collaborative agreement. The
adoption of the new standard did not have an impact on our consolidated financial statements.

Recently Issued
Accounting Pronouncements

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at
Fair Value, or ASU 2009-05. ASU 2009-05 amends Accounting Standards Codification Topic 820, Fair Value Measurements.Specifically, ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for
the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an
asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of Topic 820 of the Accounting Standards Codification (e.g. an income
approach or market approach). ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The
adoption of this standard did not have an impact on our financial position or results of operations; however, this standard may impact us in future periods.

In October 2009, the FASB issued a new accounting standard, which amends existing revenue recognition accounting pronouncements and provides accounting principles and application guidance on whether
multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate
revenue recognition based upon managements estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously, accounting principles required that the fair value
of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the
product was not individually sold because of its unique features. If the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This
new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact of this accounting standard on
its condensed consolidated financial statements.

In June 2009, the FASB issued the following new accounting standards, which have not yet
been integrated into the Codification. Accordingly, these accounting standards will remain authoritative until integrated:



| |  |  | FAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166;
SFAS 166 prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying
special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for transfer of financial assets occurring on or after January 1, 2010. We do not expect the adoption of this
standard to have an impact on our financial position or results of operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS 167; SFAS 167 amends FASB Interpretation
No. 46, Consolidation of Variable Interest Entities (revised December 2003)  an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether its variable interest or interests
give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and (2) the obligation to absorb losses of the entity that
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for all variable interest entities and relationships with
variable interest entities existing as of January 1, 2010. We have not yet determined the effect that the adoption of SFAS 167 will have on our financial position or results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

AUTOIMMUNE INC.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Results of Operations

Overview

From our inception through September 30, 2009, we have incurred ongoing
losses from operations and have cumulative losses as of September 30, 2009 totaling $110,356,000. To date, our only revenue from the sale of products has been earned through our joint venture, Colloral LLC. The majority of revenues recorded
from inception through September 30, 2009 were earned in connection with license rights, contract research and the granting of certain short-term rights. As a result, inflation has not materially affected our revenues and income from continuing
operations.

AutoImmune has granted to BioMS Medical Corp. an exclusive license to its patents pertaining to an injectable therapy for the
treatment of multiple sclerosis. Under the license agreement, BioMS makes monthly diligence payments to AutoImmune. In addition, AutoImmune will receive royalties under the license agreement if a product using the licensed technology reaches the
market. On July 27, 2009, BioMS and Eli Lilly and Company reported that dirucotide, the lead drug covered by the license agreement, did not meet the primary endpoint of delaying disease progression during the two-year Phase III trial in
patients with secondary progressive multiple sclerosis. In addition, there were no statistically significant differences between dirucotide and placebo on the secondary endpoints of the study. Eli Lilly and BioMS also announced that they would
discontinue ongoing clinical trials and review available data to develop a future plan. On September 2, 2009, BioMS and Eli Lilly announced that the license and collaboration agreement between BioMS and Eli Lilly had been terminated and that
all commercial rights to dirucotide were returned to BioMS. In the event that BioMS determines not to continue their development efforts with respect to products that include AutoImmunes technology covered by the license agreement, AutoImmune
will not receive any monthly diligence payments or royalties under the license agreement.

In August 2002, we entered into
our joint venture with Deseret by forming Colloral LLC to manufacture, market and sell Colloral® as a dietary
supplement. Our interest in Colloral LLC is greater than 50% and we actively participate in its management, but we do not have voting control of Colloral LLC. Therefore, the investment had historically been accounted for using the equity method. In
August 2005, we amended the Colloral LLC operating agreement to increase our share of distributions and allocations of profits and losses in return for our commitment to fund 100% of the costs associated with the implementation of a marketing
program for The Collagen Solution. As a result of the amendments to the operating agreement, Colloral LLC is now considered a variable interest entity, of which we are the primary beneficiary. We have consolidated Colloral LLC effective since the
third quarter of 2005.

In accordance with the amendment to the Colloral LLC operating agreement, we made additional capital contributions of
$1,032,000 to Colloral LLC from 2003 through 2007. We satisfied our funding commitment in 2006 and have made no capital contributions during the year ended December 31, 2008 or the nine months ended September 30, 2009. We may make
additional contributions to Colloral LLC in the future. There can be no assurance that the sales and marketing initiatives that have been or, in the future, may be funded by our capital contributions will be successful. Accordingly, in the future we
may again incur substantial losses.



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The following table contains selected financial data for Colloral LLC. Shipping and handling costs have been
classified as selling expenses. The balance sheet amounts as of December 31, 2008 and September 30, 2009 and Colloral LLCs operating results for the three and nine months ended September 30, 2008 and 2009 have been consolidated
into our financial statements:



|                                            |  |                                 |        |                                |   |         |  |      |        |  |   |        
|------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------- |  | ---- | ------ |  | - | -------
|                                            |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                                            |  | 2008                            |        | 2009                           |   | 2008    |  | 2009
|Statement of Operations Data:               |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Revenue                                     |  | $                               | 12,000 |                                | $ | 192,000 |  | $    | 90,000 |  | $ | 390,000
|Cost of goods sold                          |  |                                 | 1,000  |                                |   | 74,000  |  |      | 29,000 |  |   | 144,000
|Selling, general and administrative expense |  |                                 | 9,000  |                                |   | 21,000  |  |      | 47,000 |  |   | 61,000 
|Net income                                  |  | $                               | 2,000  |                                | $ | 97,000  |  | $    | 14,000 |  | $ | 185,000



|                      |  |                  |         |                   |   |        
|--------------------- |  | ---------------- | ------- | ----------------- | - | -------
|                      |  | December 31,2008 |         | September 30,2009
|Balance Sheet Data:   |  |                  |         |                   |   |        
|Current assets        |  | $                | 219,000 |                   | $ | 390,000
|Long term assets      |  |                  |        |                   |   |       
|Current liabilities   |  |                  | 6,000   |                   |   | 33,000 
|Long term liabilities |  |                  |        |                   |   |       

In 2000, we completed a market analysis of Colloral as a dietary supplement and subsequently filed a
Notice of New Dietary Ingredient with the FDA that was accepted without comment. On February 18, 2005, we received a letter from the FDA stating that the FDA reconsidered the information contained in our Notice of New Dietary
Ingredient and concluded that Colloral is not a dietary supplement but appears to be a drug under the Federal Food, Drug, and Cosmetic Act, and thus subject to the regulatory requirements for drugs. On April 15, 2005, we submitted a response to
the FDAs letter and hope to have demonstrated that the product meets the statutory definition of a dietary supplement. We cannot predict whether or not the FDA will agree with our position and what the effect of the FDAs letter will be.
It is possible that Colloral LLC and its licensed distributors will be unable to market the product as a dietary supplement and that the products will be subject to the regulatory requirements for drugs. If the FDA makes a final determination that
requires us to comply with the regulatory requirements for drugs, Colloral, The Collagen Solution and Vital 3 will be withdrawn from the market, which would eliminate the possibility of future distributions to us from Colloral LLC.

Three and Nine months ended September 30, 2008 and 2009

Revenue was $57,000 and $237,000 for the three months ended September 30, 2008 and 2009, respectively. Revenue was $225,000 and $525,000 for the nine months ended September 30, 2008 and 2009,
respectively. The revenue in the three and nine months ended September 30, 2008 and 2009 was comprised of monthly license payments from BioMS for their use of our patents pertaining to an injectable therapy for the treatment of multiple
sclerosis and option fees and product revenues generated through our joint venture, Colloral LLC, whose results are consolidated with ours. From 2006 through January 2009, Colloral LLC executed a series of agreements with Futurebiotics, LLC and
related companies whereby Futurebiotics began marketing Collorals dietary supplement under the brand name, Vital 3. Futurebiotics is currently selling product through print and e-catalogs through its affiliate, Bronson Laboratories, while it
works on both international and domestic selling opportunities. Product shipped under these agreements generated revenue of $0 and $167,000 during the three months ended September 30, 2008 and 2009, respectively, and $26,000 and $326,000 during
the nine months ended September 30, 2008 and 2009, respectively. Colloral LLC also contracted with The Shopping Channel of Canada to market Vital 3 through televised segments and through their website. Product shipped under this agreement
generated revenue of $3,000 and $18,000 during three months ended September 30, 2008 and 2009, respectively, and $28,000 and $44,000 during nine months ended September 30, 2008 and 2009, respectively. The remaining product revenue is
generated through direct sales of Colloral and The Collagen Solution to Colloral LLCs customers through its website.

Cost of goods sold
was $1,000 and $74,000 for the three months ended September 30, 2008 and 2009, respectively. Cost of goods sold was $29,000 and $144,000 for the nine months ended September 30, 2008 and 2009, respectively. Fluctuations in gross margin sold
are related to the mix of product revenues to consumers versus distributors.

Research and development expenses were $0 and $(8,000) for the
three months ended September 30, 2008 and 2009, respectively. Research and development expenses were $84,000 and $87,000 for the nine months ended September 30, 2008 and 2009, respectively. Fluctuations in research and developments costs
are a result of the timing of patent annuities and legal fees to acquire our international patents and the contracted reimbursements for patent expenses from our licensees.



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Selling, general and administrative expenses were $125,000 and $150,000 for the three months ended
September 30, 2008 and 2009, respectively. The increase was primarily related to the increase in marketing expenses of $13,000 at Colloral LLC related to The Shopping Channel. Selling, general and administrative expenses were $511,000 and
$518,000 for the nine months ended September 30, 2008 and 2009, respectively. While total expenses remained relatively consistent, there was a decrease in the stock compensation costs from $94,000 during the nine months ended September 30,
2008 to $65,000 during the nine months ended September 30, 2009 which was offset by an increase in marketing expenses of $17,000 at Colloral LLC related to The Shopping Channel and an increase in accounting and legal fees of $21,000 in the nine
months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

Interest income was $51,000 and $8,000 for
the three months ended September 30, 2008 and 2009, respectively. Interest income was $195,000 and $25,000 for the nine months ended September 30, 2008 and 2009, respectively. The decreases are due to a lower average return on investment
and a lower average balance of cash and marketable securities available for investment.

Net income attributable to noncontrolling interest
was $2,000 and $24,000 for the three months ended September 30, 2008 and 2009, respectively. Net income attributable to noncontrolling interest was $3,000 and $46,000 for the nine months ended September 30, 2008 and 2009, respectively. The
net income attributable to noncontrolling interest reflects Deserets share of Colloral LLCs profits or losses calculated in accordance with the amended terms of the Colloral LLC operating agreement.

Liquidity and Capital Resources

Our needs for funds have historically fluctuated from period to period as we have increased or decreased the scope of our research and development activities. Since inception, we have funded these needs almost entirely through sales of our
equity securities. Our current needs have been significantly reduced as a result of the termination of our direct research and development activities, all full-time employees and other sources of operating expenses in 1999.

We hold an interest in Colloral LLC, which is manufacturing, marketing and selling Colloral, The Collagen Solution and Vital 3 as dietary supplements, and
manufacturing Vital 3 for sale by Futurebiotics LLC and related companies. While we are not contractually committed to make additional capital contributions to Colloral LLC, we may elect to do so. Despite any additional investment, there can be no
assurance that these efforts will be successful. Accordingly, in the future we may again incur substantial losses.

Our working capital and
capital requirements will depend on numerous factors, including the strategic direction that we and our shareholders choose, the level of resources that we devote to the development of our patented products, the extent to which we proceed by means
of collaborative relationships with pharmaceutical or nutraceutical companies and our competitive environment. During the nine months ended September 30, 2009, our cash and marketable securities decreased $327,000. The most significant uses of
cash for the nine months ended September 30, 2009 were legal and accounting expenses totaling $252,000. We expect to continue to use our current cash and marketable securities on hand to fund our operations and development efforts. Based upon
our budget for calendar year 2009 and current expectations for future years, we believe that current cash and marketable securities, and the interest earned from the investment thereof, will be sufficient to meet our operating expenses and capital
requirements for at least the next five years.

On October 21, 2009, our Board of Directors authorized the retention of
Junewicz & Co., Inc. to lead the exploration of a full range of strategic alternatives in order to enhance shareholder value. Those strategic options include, but are not limited to, the sale or merger of the company.

In order to preserve principal and maintain liquidity, our funds are generally invested in U.S. Treasury obligations and money market instruments. As of
September 30, 2009, our cash, cash equivalents and marketable securities totaled $8,148,000. Current liabilities at September 30, 2009 were $144,000.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any
special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. Effective for the third quarter of 2005, we are required to
consolidate Colloral LLC, a joint venture for the development and marketing of dietary supplements.



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Recently Issued Accounting Pronouncements

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value, or ASU 2009-05. ASU 2009-05 amends
Accounting Standards Codification Topic 820, Fair Value Measurements.Specifically, ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities
or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of Topic 820 of the Accounting Standards Codification (e.g. an income approach or market approach). ASU 2009-05 also clarifies
that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The adoption of this standard did not have an impact on our
financial position or results of operations; however, this standard may impact us in future periods.

In October 2009, the FASB issued a new
accounting standard, which amends existing revenue recognition accounting pronouncements and provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the
consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon managements estimate of the selling price for
an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously, accounting principles required that the fair value of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. If the fair
value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact of this accounting standard on its condensed consolidated financial statements.

In June 2009, the FASB issued the following new accounting standards, which have not yet been integrated into the Codification. Accordingly, these
accounting standards will remain authoritative until integrated:



| |  |  | FAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166;
SFAS 166 prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying
special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for transfer of financial assets occurring on or after January 1, 2010. We do not expect the adoption of this
standard to have an impact on our financial position or results of operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS 167; SFAS 167 amends FASB Interpretation
No. 46, Consolidation of Variable Interest Entities (revised December 2003)  an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether its variable interest or interests
give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could
potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for
all variable interest entities and relationships with variable interest entities existing as of January 1, 2010. We have not yet determined the effect that the adoption of SFAS 167 will have on our financial position or results of
operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Forward-Looking Statements

Statements in this Quarterly Report that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements about our future operating results, strategic relationships and product development. You can identify these forward-looking
statements because they involve our expectations, beliefs, projections, anticipations or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks
and uncertainties that may cause our actual results to differ significantly from results discussed in the forward-looking statements. These factors include, but are not limited to, our extremely limited operations, the uncertainties of clinical
trial results and product development efforts, our dependence on third parties for licensing and other revenue, our dependence on determinations of regulatory authorities and risks of



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technological change and competition. These factors are more fully discussed in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission in the section
Risk Factors. We have no plans, and disclaim any obligation, to update or revise any forward-looking statements whether as a result of new information, future events or other factors, except as required by law.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We have invested all of our cash in U.S. Government Agency debt securities and money market instruments. These investments are denominated in U.S. dollars. Our exposure to market interest rate risk
relates to our cash, cash equivalents and marketable securities. As of September 30, 2009, our $8,148,000 of cash, cash equivalents ad marketable securities consisted of Government agency and treasury money market instruments and U.S.
Government Agency debt securities. Due to the conservative nature of these instruments, we do not believe that a change in market rates would have a material negative impact on the value of our cash, cash equivalents or marketable securities.
Declines of interest rates over time will, however, reduce our interest income from our investments. Interest income was $25,000 for the nine months ended September 30, 2009, down from $195,000 for the nine months ended September 30, 2008.
A 1% change in interest rates could affect our annual interest income by approximately $80,000.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Managements Evaluation of Disclosure Controls and Procedures

The Companys management, consisting of our
Chief Executive Officer and Director of Finance and Treasurer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended) as of September 30, 2009. Based upon this evaluation, our Chief Executive Officer and Director of Finance and Treasurer concluded that, as of September 30, 2009, our disclosure controls and procedures were effective in
providing reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms.

Changes in Internal Control

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Securities Exchange Act of
1934, as amended) during the quarter ended September 30, 2009 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART IIOTHER INFORMATION



|ITEM 6. | EXHIBITS
|------- | --------

Exhibits
(numbered in accordance with Item 601 of Regulation S-K)



|              |  |                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                          
|31.1          |  | Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a)                      
|              | 
|31.2          |  | Certification of the Director of Finance and Treasurer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a)            
|              | 
|32.1          |  | Certification of the Chief Executive Officer and Director of Finance and Treasurer pursuant to 18 U.S.C. Section 1350



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                        |  |                                                
|----------------------- |  | -----------------------------------------------
|                        |  | AUTOIMMUNE INC.                                
|                        | 
|Date: November 13, 2009 |  | /S/    ROBERT C.
BISHOP                        
|                        |  | Robert C. Bishop                               
|                        |  | Chairman, President and Chief Executive Officer
|                        | 
|Date: November 13, 2009 |  | /S/    DIANE M.
MCCLINTOCK                     
|                        |  | Diane M. McClintock                            
|                        |  | Director of Finance and Treasurer              



18